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Paul Graham and Trevor Blackwell, two of the co-founders of Y Combinator, a long time ago created a graph of the life of a startup. The graph covers the highs, lows, and if successful the ultimate success of a startup, which, when they created this, was considered to be an acquisition by a larger company. This graph has become a common understanding of the life of a new company, but one dramatic difference since Y Combinator was founded was the shift of a successful company moving from acquisition to IPO and successful public company. And being a newly public company after starting a startup shares many attributes of this graph Paul and Trevor created.
TechCrunch Initiation = IPO
The original graph starts with a TechCrunch article that announces you to the world. This create a high amount of hype and new customer adoption, for a time. You’ve made it! For newly public companies, this is the IPO, your arrival on the big stage with lots of other big businesses being traded alongside you. Employees are excited (and about to be rich!). You’re a real adult company now, and your IPO announces that you now know how to run a mature businesses that can predictably grow.
Post-TechCrunch Trough of Sorrow = Post-IPO Trough of Sorrow
While some IPOs transition to be a public company quite easily, most take a while, if they ever, to transition to the rhythm of a successful public company with constant public investor eyes on them. They inevitably over-promise and under-deliver as a new public company to public market investors, and the response if that many investors sell and put you in a penalty box. They say you’re not an adult company; you’re an adolescent. And you need to prove you can grow up before they will pay attention again. This is the Post-IPO trough of Sorrow, and it’s extremely common. I saw it shortly after I left Grubhub, saw it when Pinterest went public a couple years after I left, experienced it directly at Eventbrite, noticed it with a lot of peer companies as well as advised some companies through it.
In the Post-IPO Trough of Sorrow, the company needs to prove to public market investors it can scale out of its startup roots and manage the business correctly. What no one ever talks about is this typically means the entire management team has to turn over. The skills to scale a company to IPO aren’t actually that similar to scaling a public company. The entire Grubhub management team turned over two years post-IPO except for CEO and CFO. Similar changes happened at Pinterest that even included the CEO and CFO. At Eventbrite, by the time I hit my first year as Chief Product Officer, every exec role changed hands except for the CEO role. These new execs bring a rigor and experience your startup exec team may have lacked, but it takes time for them to change the culture and operating rhythms of the business to match public market investor expectations. And even when you start to turn things around, it takes a while for the public markets to notice, because they have already written you off as a failed IPO.
The Promised Land = Market Cap Growth
If the company actually does the right work to “grow up”, and hire the right people, improve operations, and focus the strategy, predictable growth that exceeds expectations will gradually start to make public market investors pay attention again. Sometimes, this takes the form of a company gradually improving until its performance can no longer be ignored. Netflix can be considered an example of this. Sometimes, it’s an example of luck equals preparation plus opportunity, like Etsy with mask selling during the pandemic. The company had quietly worked for years to overhaul how it operated, bring in new leaders, improve its margin, and improve its product experience. It took the pandemic for it to cash in on all that hard work, but the company was ready because of the work it had been putting in for years.
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Going public is hard, and will re-create some experiences founders haven’t felt for a long time. It can feel like losing product/market fit and needing to find it again, but instead of with customers, with a new class of investors. Overhauling the company to provide the type of predictable growth and profits public takes time, but eventually works out the same way grinding to product/market fit and scaling a company does at a startup, just with probably different leaders.
The Post-IPO Trough of Sorrow